Buy to Let now...or wait a year??

Dithering_Dad

IveSeenTheLight wrote: »

Well if it falls, then it would be worth less, but then again, nowhere in history (even in Japan) has house prices been lower than they were 25 years previously

If you flatten out the peaks and troughs of the booms and crashes, aren't houseprices just keeping up with inflation or with average earning?

IveSeenTheLight

Dithering_Dad wrote: »

If you flatten out the peaks and troughs of the booms and crashes, aren't houseprices just keeping up with inflation or with average earning?

Probably.
Prices peak way above inflation / wage rate, then "crash" way below inflation / wage rate, then recover to the inflation / wage rate, then peak again and the cylce continues.

Does this not back up my point a bit in that I was comparing to the 150k without any increase. Theoretically at 3% inflation / wage rise this would mean after 25 years the 150k is 314K, thus the inital 30k investment would need a nett return of 9.85% or 12.3% gross from the bank / other investments

HammersFan

shellbell63 wrote: »

A lot of the 'anti' BTL brigade seem to be tarring us all with the same brush. Believing that most of us have funded the deposit by 'borrowing' on own home or some other form of loan. That we've all jumped on the bandwagon, without a second thought. There are those who've been tempted into this - & I for one feel sorry for them. After all they are only trying to better themselves, as is the instinct of all of us.

The fact that we are here discussing it, seems to me that we are in the 'sensible' BTL landlords group. I for one, thought it thru', would never borrow to find the deposit. I have no intention of selling in the short term. And if the preverbial hit the fan, then I could pay off any mortgage. So defo no tenants on the street. Would only buy if all costs covered.

Here my take on it. We put 30k as deposit on house. If we'd put that into savings at say an average of 8%pa for 20 years, that would be worth - to us as higher rate tax payer - between 76 & 77000. In 20 years when we retire, if we use the interest on our 76 - 77k as an income, & assuming we still get 8%, but this is now tax free, we'd get £510pm.
Thats a lot less than our BTL is producing in rent now. With inflation, in 20 years I'd expect it to produce even more, but even if remained the same forever, we still get more back month on month from the BTL - even after contingency fund, insurance, replacement/renewals etc.
If, as with my inlaws, interest rates fell, we'd get much less interest per month, if money was in bank. However if BTL mortgage gone, interest rates will not affect our rental. Provided we've bought well & in a good area & keep property up together & nice, there will always be someone needing or wanting to rent - even if house prices were much more affordable than they are now.

Please don't shout me down in flames. I'm not a financial wiskid or expert. Just an ordinary punter, making a decision about their future - as we all do.

What an absolutely terrific post. I couldn't have put it better myself. Good luck and well done for provoking such a debate (it was a shame people felt the need to get nasty throughout, but that's just this corner of MSE for you - don't let it put you off!).

Dithering_Dad

shellbell63 wrote: »

Here my take on it. We put 30k as deposit on house. If we'd put that into savings at say an average of 8%pa for 20 years, that would be worth - to us as higher rate tax payer - between 76 & 77000. In 20 years when we retire, if we use the interest on our 76 - 77k as an income, & assuming we still get 8%, but this is now tax free, we'd get £510pm.

If you saved up your deposit of 30k then I'm assuming you saved it over a number of years? While you are saving you could have put this into a cash ISA at 5.5% and saved up £6000 each year (as a couple). In 5 years you have your deposit and you're ready to start BTLing.

You withdraw your cash from the bank and buy a house. You spend £500 of it on legal costs and searches, £300 on a survey, £1000 on valuation and arrangement fees and £500 on stamp duty. You furnish it and buy white goods for the kitchen to the tune of £2000. You get your electricity and ges checks done for £50 and you're now set to rent it out.

Lets say it takes a month to do the above. You have lost £125 in interest on the ISA and it has cost you £4350 to acquire the house and get it ready to be rented out. In one month you're already down £4475.

Time passes....

In 20 years, your ISA grows tax free at 5.5% to £87532.72. If you left the principle amount and took out the interest on the £87k you'd receive £4814.30pa or £401,19pm totally tax free.

Who really knows if the rent will cover the cost of the house in the full 20 years? but here are some costings... In the same 20 years your house has been remortgaged every 4 years, each time costing £1000. This is £5000. You have redecorated and replaced the furniture, carpets and white goods 3 times (3 x £2000). You've had to evict 3 people (3 x £3000). Your letting agent takes 10% of the monthly amount the first month's rent (£xxxx). You replaced the Boiler twice (2 x £1000), etc.

For your example though. Imagine that the rent did cover all eventualities and you now retire...

The rental income is say £600. The agent takes 10%, so £60. You have to pay for insurance and water rates (£10). You have general maintenance that comes to about £2 per month. Your income is now £528 per month.

Your state pension and state second pension use up your tax free alloance and you now have to pay 20% tax on your rental income. Your income is now £422.40 after tax.

so £422.40 with a BTL as opposed to £401.19 tax free.

However.... your tenant leaves and you can't find another one for 3 months. Suddenly your gross BTL income is down by £1800, yet you still have to pay for maintenance & insurance. Your agent finds you another tenant but he takes the first month's rent as finders fee. You have lost another £600.

Months later... your tenant leaves and you can't find another one for two months....

2 Years later... a Hurricane strikes and your roof is blown off. You have to sort all this out though luckily your insurance covers it (well, apart from the excess). You need to house your tenants in a hotel/B&B while the work takes place - does your insurance cover this?

3 years later your tenant loses his job and stops paying the rent. You go through legal proceedings to get him out.

You're on your golden years yet you're messing about with repairs, intransient tenants, moans and gripes, legal costs,etc, etc. You're worn out by this and you get ill. You want to sell the house but there is a housing crash and they're not selling.

Not the sort of carefree retirement I'm looking forward to!

HammersFan

Dithering_Dad wrote: »

If you saved up your deposit of 30k then I'm assuming you saved it over a number of years? While you are saving you could have put this into a cash ISA at 5.5% and saved up £6000 each year (as a couple). In 5 years you have your deposit and you're ready to start BTLing.

You withdraw your cash from the bank and buy a house. You spend £500 of it on legal costs and searches, £300 on a survey, £1000 on valuation and arrangement fees and £500 on stamp duty. You furnish it and buy white goods for the kitchen to the tune of £2000. You get your electricity and ges checks done for £50 and you're now set to rent it out.

Lets say it takes a month to do the above. You have lost £125 in interest on the ISA and it has cost you £4350 to acquire the house and get it ready to be rented out. In one month you're already down £4475.

Time passes....

In 20 years, your ISA grows tax free at 5.5% to £87532.72. If you left the principle amount and took out the interest on the £87k you'd receive £4814.30pa or £401,19pm totally tax free.

Who really knows if the rent will cover the cost of the house in the full 20 years? but here are some costings... In the same 20 years your house has been remortgaged every 4 years, each time costing £1000. This is £5000. You have redecorated and replaced the furniture, carpets and white goods 3 times (3 x £2000). You've had to evict 3 people (3 x £3000). Your letting agent takes 10% of the monthly amount the first month's rent (£xxxx). You replaced the Boiler twice (2 x £1000), etc.

For your example though. Imagine that the rent did cover all eventualities and you now retire...

The rental income is say £600. The agent takes 10%, so £60. You have to pay for insurance and water rates (£10). You have general maintenance that comes to about £2 per month. Your income is now £528 per month.

Your state pension and state second pension use up your tax free alloance and you now have to pay 20% tax on your rental income. Your income is now £422.40 after tax.

so £422.40 with a BTL as opposed to £401.19 tax free.

However.... your tenant leaves and you can't find another one for 3 months. Suddenly your gross BTL income is down by £1800, yet you still have to pay for maintenance & insurance. Your agent finds you another tenant but he takes the first month's rent as finders fee. You have lost another £600.

Months later... your tenant leaves and you can't find another one for two months....

2 Years later... a Hurricane strikes and your roof is blown off. You have to sort all this out though luckily your insurance covers it (well, apart from the excess). You need to house your tenants in a hotel/B&B while the work takes place - does your insurance cover this?

3 years later your tenant loses his job and stops paying the rent. You go through legal proceedings to get him out.

You're on your golden years yet you're messing about with repairs, intransient tenants, moans and gripes, legal costs,etc, etc. You're worn out by this and you get ill. You want to sell the house but there is a housing crash and they're not selling.

Not the sort of carefree retirement I'm looking forward to!

DD I can only assume this is a wind-up since it is so full of holes. I will point out just two.

1. Do you really think that the property will have gained only around £50k in 20 years. That is cloud cuckoo land. Even the most pessimistic commentator would expect the propert to double from today's vaule. This would make the amount of equity around 130k as opposed to the 87k in the ISA.

2. Do you really expect rent to be £600 in 20 years. It will be around double that figure if rents just keep pace with increases in earnings of, lets say, 3.5% per year. You know you will get around £400 from the ISA which will just about cover the monthly electricity bill in 2028.

In the example you cite the BTL'er would, more likely have £130k equity (even if they chose not to pay off the loan - which would be pretty easy to do over that time period), and be pocketing a good figure above the cost of the mortage (perhaps around £700-800 per month).

You don't like BTL. That's fair enough, but I think its a bit misleading to present such a pessimistic worst case scenario as carefully calculated fact.

Dithering_Dad

IveSeenTheLight wrote: »

Probably.
Prices peak way above inflation / wage rate, then "crash" way below inflation / wage rate, then recover to the inflation / wage rate, then peak again and the cylce continues.

Does this not back up my point a bit in that I was comparing to the 150k without any increase. Theoretically at 3% inflation / wage rise this would mean after 25 years the 150k is 314K, thus the inital 30k investment would need a nett return of 9.85% or 12.3% gross from the bank / other investments

It does back up the point about you not including any HPI into your calculations - though it does throw a spanner into the works of those who have said that they BTL for the HPI and not for the rent.

what you forget when you mention with the £150k becoming £314k is that to realise this amount in cash you will need to sell the house. So lets deduct the estate agent at 2% and say £3000 in legal costs, removal costs, HIPS, etc. You now have cash in the bank of £304,720. Capital gains tax of 18% over 8k = 304720 - 150000 = 154720 - 8000 = 146720 / 18% = £26409.60 in cap gain tax. So after costs and tax, your house sale nets you £278310.40

Not sure what return you need from the ISA to match this, but I do know that you now have £278310 in cash and need to invest it somewhere to avoid paying tax on the interest. um, you can't put it into an ISA because it'll take years to drip feed that away. If you leave it in a savings acount you'll pay 20% tax on the interest.....

dopester

IveSeenTheLight wrote: »

Well if it falls, then it would be worth less, but then again, nowhere in history (even in Japan) has house prices been lower than they were 25 years previously

You mean no time since the end of WWII and the long-wave + cold-war inflation we've had since then.

Go back a little further in history. It might teach you something.

And like Brit's opportunity cost. You only have to go to the homes of Greenwich NY that sold for a million-dollars in 1929, that changed hands for as little as $75,000 in the 1930s to see what a economic and house price crash can do - even in supposedly wealthy and desirable places.

shellbell63

Dithering_Dad wrote: »

If you saved up your deposit of 30k then I'm assuming you saved it over a number of years? While you are saving you could have put this into a cash ISA at 5.5% and saved up £6000 each year (as a couple). In 5 years you have your deposit and you're ready to start BTLing.

You withdraw your cash from the bank and buy a house. You spend £500 of it on legal costs and searches, £300 on a survey, £1000 on valuation and arrangement fees and £500 on stamp duty. You furnish it and buy white goods for the kitchen to the tune of £2000. You get your electricity and ges checks done for £50 and you're now set to rent it out.

Lets say it takes a month to do the above. You have lost £125 in interest on the ISA and it has cost you £4350 to acquire the house and get it ready to be rented out. In one month you're already down £4475.

Time passes....

In 20 years, your ISA grows tax free at 5.5% to £87532.72. If you left the principle amount and took out the interest on the £87k you'd receive £4814.30pa or £401,19pm totally tax free.

Who really knows if the rent will cover the cost of the house in the full 20 years? but here are some costings... In the same 20 years your house has been remortgaged every 4 years, each time costing £1000. This is £5000. You have redecorated and replaced the furniture, carpets and white goods 3 times (3 x £2000). You've had to evict 3 people (3 x £3000). Your letting agent takes 10% of the monthly amount the first month's rent (£xxxx). You replaced the Boiler twice (2 x £1000), etc.

For your example though. Imagine that the rent did cover all eventualities and you now retire...

The rental income is say £600. The agent takes 10%, so £60. You have to pay for insurance and water rates (£10). You have general maintenance that comes to about £2 per month. Your income is now £528 per month.

Your state pension and state second pension use up your tax free alloance and you now have to pay 20% tax on your rental income. Your income is now £422.40 after tax.

so £422.40 with a BTL as opposed to £401.19 tax free.

However.... your tenant leaves and you can't find another one for 3 months. Suddenly your gross BTL income is down by £1800, yet you still have to pay for maintenance & insurance. Your agent finds you another tenant but he takes the first month's rent as finders fee. You have lost another £600.

Months later... your tenant leaves and you can't find another one for two months....

2 Years later... a Hurricane strikes and your roof is blown off. You have to sort all this out though luckily your insurance covers it (well, apart from the excess). You need to house your tenants in a hotel/B&B while the work takes place - does your insurance cover this?

3 years later your tenant loses his job and stops paying the rent. You go through legal proceedings to get him out.

You're on your golden years yet you're messing about with repairs, intransient tenants, moans and gripes, legal costs,etc, etc. You're worn out by this and you get ill. You want to sell the house but there is a housing crash and they're not selling.

Not the sort of carefree retirement I'm looking forward to!

Sorry found this a bit comical really.

Firstly you assume we haven't already used up our ISA allocation & secondly a lot of your costs do not apply in our case.
We don't provide furniture, white goods etc. Thats not norm in our preferred area. We buy locally, so don't employ agents, except for sourcing a tenant. My other half is pretty handy & is actually looking forward to pottering around in retirement doing odd jobs - says it'll keep him sane (dunno if thats 'cause I'll drive him INsane!).

Yes there may be a bad tenant or two(though if you pick wisely, this is less likely than if you rent out a *hole in a bad area) - but there may be a crash & your stocks & shares are worth little when you want to retire, or interest rates may dive & you don't get your 5.5% on your ISA.......

Thats the problem - if we could all just get those crystal balls working properly, we'd all be heading in the same direction & quids in. Unfortunately lifes full of twists & turns, & none of us quite know.... so we all take our best guess & hope we're right..... or somewhere handy at least.

Mind you if we were all heading in the same direction - we'd grind to a halt wouldn't we. Imagine everyone decides to buy..... whos gonna sell? Everyone saves & noone borrows.... banks don't need savers money anymore as they're drowning in it, so rates plummet.
Thats the beauty of this world - we're all different & we need to be - to keep the world turning.

I'm not against your strategy at all - just think theres a place for BTL as well. - at least for me there is. And as they say, never put all your eggs in one basket. So diversify, is my motto. But I still see our BTL strategy as backbone/constant of our retirement plan.

Dithering_Dad

HammersFan wrote: »

DD I can only assume this is a wind-up since it is so full of holes. I will point out just two.

1. Do you really think that the property will have gained only around £50k in 20 years. That is cloud cuckoo land. Even the most pessimistic commentator would expect the propert to double from today's vaule. This would make the amount of equity around 130k as opposed to the 87k in the ISA.

2. Do you really expect rent to be £600 in 20 years. It will be around double that figure if rents just keep pace with increases in earnings of, lets say, 3.5% per year. You know you will get around £400 from the ISA which will just about cover the monthly electricity bill in 2028.

3. In the example you cite the BTL'er would, more likely have £130k equity (even if they chose not to pay off the loan - which would be pretty easy to do over that time period), and be pocketing a good figure above the cost of the mortage (perhaps around £700-800 per month).

You don't like BTL. That's fair enough, but I think its a bit misleading to present such a pessimistic worst case scenario as carefully calculated fact.

Is my example any more 'biased' than the ones put forward by the BTLers? As Edward Heath once said "I only believe the statistics that support my argument" and I think this is the case here. If BTL is as lucrative as you say it should be easy for you to confirm this, but apart from some vague figures from people who have been doing it for a couple of years, I've seen nothing.

To address your points...

1. We established earlier that if you flatten out the booms and busts, the value of houses roughtly keeps pace with inflation/average earnings. We also established that to realise the gains in the house you have to sell it and pay capital gains tax and other costs. I'm a bit tired of doing the calcs so please have a go yourself at calculating the cap gains on this property and then compare against the ISA, then tell me what you will do with the equity once it's in your bank in oder to avoid 20% tax on the interest.

2. You will pay income tax on any profit on the rent that is above the cost of maintaining the BTL. this is 20% or 40% depending on your tax bracket. You pay no tax on the ISA.

3. If you overpay on the BTL you just make more of the rental income subject to tax. However if you decide to overpay anyway, you could also pay more money into the ISA over the years. All of which is tax free.

I came into the debate after actually looking at some properties with a view to BTL. I leave the debate thinking that it's just not worth the effort and I'd be better off finding a different vehicle. The fact thet you're now trying to stifle the debate because of the issues I've raised leads me to think that if the investment is so shaky that someone gets annoyed because one person pokes holes in it, then it really is best left alone!!

Conrad

Ok, well I am at the very crossroads of investment right now.
I'm comming down on the side of a B2L now.

Here's the situation;

Cash in Bank from the sale of a property.

OPTION 1 - Pay down my commercial mortgage and save £580 per month in interest.

OPTION 2 - Use cash as deposit on a property costing £200k which I will let as an unofficial, but fully legal HMO for £2,000 per m;

Therefore I still have to pay my shop loan interest at £580 per month.
BUT - The property WILL let for £2000 pm gross, or £1500 per month after all expenses.
That £1500 nets down to £1000 per month after the B2L mortgage interest costs of £500 per month are taken.

That £1000 is sufficient to cover my shop loan and give a little monthly profit, BUT..........

I stand to make I c£50,000 in capital growth after selling and buying costs once the market returns, which reasonably could be within 1 - 3 years.
My tax afairs are such that there will be little tax to pay on the growth. Plus the rent profit of say £300 pm after any occasional repairs or voids (voids are pretty much non existent here)

WHY WILL IT GO UP £50,000+?
The prices today for DESPERATE sellers are £50 - 100k less here. However, the bulk of sellers are not desperate so will not sell now.
As soon as rates fall, and sentiment improves which it always does, those desperate situations will simply vanish as buyers return in number and prices go back to where they were.


So I face a simple choice;

Repay debt now and save £21000 in interst on the shop loan over 3 years

Aquire the B2L, let it fully cover the shop loan, and wait for £50,000+ capital growth. Even if I have to spend £7500 on repairs over 3 years (not likely in my experience unless you go for a run down property which I will not), thats still a profit of over £40000 without even allowing for the rent profit each month.

HMO - I'm well aware of the pitfalls, but you should know that the way an agent does it here is very professional, letting only to qualified tenants on 6 m contracts with 2 m in advance. The owners have to abide by a strict code of conduct (for example we provide a nice communal living room - instead of treating people like animals stuffed into every corner) and as such a better quality tenant is attracted.

BTW - Im aiming to get a property for about £15000 less if possible but with the same rent.

HMO can be a pain in the but if done incorrectly, Gigsby